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| Tuesday, February 9, 2010 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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September 21, 2008 12:01 AM ET
Yet another irony of these credit-crunched times: Even the seemingly safest investment vehicles can pose the most significant threats to financial companies and their customers. Risk-rattled institutional investors yanked at least $176 billion out of money market mutual funds last week, according to the most recent data from the Investment Company Institute. That’s one-third of all the institutional money that had been plowed into these supposed safe havens over the last year as investors fled volatile and exotic markets laden with uncertainties. By week’s end, these redemptions had crippled one of the largest managers of money-market funds, caused another prominent money manager to shut down a $12 billion institutional fund, and prompted several other firms to prop up their funds with new billions. The U.S. Treasury Department was forced to step in last Friday and offer to temporarily insure money-market funds, while the Federal Reserve acted to shore up liquidity. The intervention came just two days after demand for the safest short-term assets around—three-month Treasury bills—surged so high it pushed the yield into negative territory for the first time in almost 70 years. “If a treasurer at a large company is getting the same low, but safe returns on their cash as everyone else, his constituents can accept that,” said Denise Valentine, senior analyst at Aite Group, who focuses on cash management. “But if you’re in a money fund that loses even one cent on the dollar right now? That can cost you your job.” All it took to shell-shock a market that has been watching one white shoe drop after another was for an asset management firm to go ahead and do the unthinkable. The Reserve Management Corp., the creator of money-market funds, acknowledged that its largest and oldest fund held $785 million in commercial paper issued by Lehman that had become worthless with the brokerage’s bankruptcy last Monday. This exposed investors in the Reserve’s $62 billion Primary Reserve Fund to losses—the first time in more than a decade any money-market fund had reported seeing that—as net asset value (NAV) fell to $0.97 a share, or “broke the buck.” “Everyone thinks that money-market funds are super secure,” said Jeff Rubin, director of research at Birinyi Associates. “When an event doesn’t happen for decades, it’s a shock to the system, especially one that’s so big, and so prominent, and so old.” The Reserve had two other funds that broke the buck last week, but the money manager froze redemptions from a number of its offerings after a run targeting the Primary fund. Over the course of last week, the $62 billion fund had redemption re-quests of $60 billion, the Reserve confirmed late Friday. The Reserve has since been hit with at least two separate lawsuits, including one on Friday from Ameriprise Financial, which has clients with more than 300,000 accounts invested in the Primary fund, according to the suit. An official with the Reserve declined to comment. The run fueled fears among institutional investors that other funds could be next. Evergreen Investments, Bank of New York Mellon, Russell Investments and Columbia all disclosed holding Lehman paper in their money-market funds. Unlike the Reserve, they each have a large parent company capable of backing their funds to ensure investors didn’t sustain losses. Wachovia, parent to Evergreen, for instance, pumped money into three Evergreen funds (which held a combined $494 million in Lehman debt, according to filings) to keep investors whole and NAVs above the magic $1 mark. The money-market mayhem wasn’t confined to funds that held Lehman debt—or indeed any paper from on-the-brink financials. “It seems if you’re a money fund manager, you’re just guilty by association,” said Cathy Gregg, partner at Treasury Strategies. “Even if the assets you’re holding are of quality, it doesn’t appear that investors care.” Nowhere was this more obvious than at Putnam Investments. The Boston-based firm last Thursday was forced to abruptly close one of the largest institutional money funds around, its Prime Money Market Fund, after investors rapidly redeemed assets from the fund early last week. This happened even though Putnam officials noted that the fund had no exposure to Lehman, derivatives-battered AIG or struggling thrift Washington Mutual. A Putnam spokeswoman declined to specify how much money institutional investors had pulled from the fund, but acknowledged it had assets of $12.3 billion at the end of Sept. 16. A public filing shows it had more than $15 billion in assets at the end of August. Elsewhere, typically accessible officials in the steady-Eddie money-market world were nowhere to be found last week, as the stream of redemptions had portfolio managers scrambling to sell off assets in as orderly a way as possible, while executives reached out to quell the concerns of clients. More than a dozen of the largest asset managers—including Federated Investors, BlackRock, Fidelity, J.P. Morgan, Deutsche and State Street—wrote letters to clients or issued public statements, sometimes both, to affirm the health of their funds and discuss their holdings. Some set up unscheduled conference calls with clients: Federated, manager of more than $270 billion in money-market assets, drew more than 1,000 callers for an impromptu dial-in last Wednesday morning. Despite these efforts, many of the firms were still smacked around by investors. Federated, for one, reported that assets in its money funds had declined by $1.7 billion as of 1 p.m. on Thursday. As tumultuous as things were in the money-fund industry, it could have been worse: Had the government not announced its $85 billion bailout of AIG, money funds that held debt issued by AIG likely would have faced even more pressure in preserving value for investors—triggering an even more substantial run on these funds. “We’re thankful for the AIG resolution,” Debbie Cunningham, chief investment officer for taxable money funds at Federated, noted during the call last Wednesday. While that action insulated money funds from further impairment, it was the federal government’s insurance intervention last Friday that may spare the industry from ultimate harm. Said Peter Crane, president of money fund researcher Crane Data: “Apparently, they have now deemed a $3.5 trillion industry too big to fail.” FW
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